Asia's capex cycle is broadening beyond AI

Artificial intelligence (AI) has dominated market returns and investor attention for much of the past two years.

A small group of technology companies has captured an outsized share of both capital and headlines, pushing valuations higher and leaving investors increasingly sensitive to signs that expectations may have run ahead of reality.

The challenge for investors today is straightforward. Where can they still find earnings growth without paying a premium for it?

Asia and emerging markets (EM) offer a compelling answer, offering two attributes that rarely co-exist. Valuations remain significantly lower than many developed markets, while a large and broad-based capital spending cycle is supporting earnings growth across industries ranging from semiconductors and power equipment to factory automation, infrastructure and industrial machinery.

For Australian investors, that opportunity is particularly relevant. The ASX remains concentrated in banks and resource companies.

Those sectors have delivered strong long-term returns, but they provide limited exposure to many of the industries benefiting from rising investment in advanced manufacturing and industrial upgrading across Asia.

The capital spending cycle is bigger than AI

Investors often associate the capital expenditure (capex) story solely with AI. While AI is a major driver, a much broader investment cycle is under way, spanning manufacturing, infrastructure, energy systems and industrial modernisation. This is creating earnings opportunities across a far wider group of companies than the market often recognises.

Morgan Stanley estimates that total capital expenditure across Asia could increase from US$12.1 trillion in 2026 to US$15.7 trillion by 2030. By comparison, spending by AI cloud providers and semiconductor manufacturers is projected to reach US$830 billion, while broader industrial investment could exceed US$5 trillion, according to Morgan Stanley.

The AI build-out itself extends well beyond chip designers. Data centres need advanced memory, manufacturing equipment, packaging, testing, networking, cooling and reliable power. J.P. Morgan expects server memory content growth to exceed 30%, compared with a historical rate of 15% to 20%. Server-grade memory also commands a price premium of 30% to 40% over consumer products.

This broader cycle is visible across the region. Japan is benefiting from rising automation spending and corporate investment. India continues to invest heavily in infrastructure and manufacturing capacity. Taiwan and Korea remain central to global technology supply chains, while Southeast Asia is attracting investment linked to supply-chain relocation and industrial expansion.

How all this spending is financed also matters. Asia's AI investment is forecast to rise from US$80 billion in 2025 to US$195 billion in 2026 and US$250 billion in 2027, according to Morgan Stanley, with the bulk of the 2026 total expected to come from internal cash flow and balance sheet cash.

Eight of the 12 Asian economies covered by Morgan Stanley run current account surpluses, meaning they save more than they need to fund domestic investment. This gives the cycle a sounder base and reduces reliance on expensive US-dollar borrowing.

Valuation becoming an increasingly important differentiator

This comes at a time when valuations across much of Asia and emerging markets remain relatively undemanding.

The ASX 200 currently trades at around 18 times forward earnings, above its long-term average of 14.9 times. By comparison, Morgan Stanley emerging markets trade at roughly 10.1 times forward earnings and Asia Pacific ex-Japan at around 11.1 times.

These are not like-for-like markets, and differences in sector mix and earnings cycles explain part of the gap. Even so, investors can still access markets where earnings expectations remain healthy without paying the multiples common in many developed markets.

China is a good example, trading on a forward price-to-earnings (PE) ratio of around 11 times despite consensus forecasts for double-digit earnings growth, Goldman Sachs  says.

The emerging ASEAN markets combine reasonable valuations with positive earnings expectations, while Taiwan trades at a premium due to stronger growth linked to AI and advanced manufacturing. Korea trades on a low headline multiple because expected technology earnings are unusually strong.

The diversity of valuation and growth profiles across Asia gives investors a broader opportunity set than many developed markets.

Stock selection remains important, as cheap markets can stay cheap and parts of the AI supply chain already reflect demanding expectations.

The opportunity set is becoming more diversified

Semiconductor companies in Taiwan and Korea remain major beneficiaries, but the earnings opportunity now extends across factory automation, power infrastructure, industrials and financials.

Rising investment in infrastructure, manufacturing and supply chains is creating opportunities across Asia. India is benefiting from manufacturing expansion and infrastructure spending, while Japan offers exposure to automation, electrical equipment and corporate reform.

Korea combines strong semiconductor positioning with growing investment in defence, power and industrial capacity.

This breadth matters for Australian investors. Australian portfolios are already heavily exposed to banks and resources. Asia adds exposure to advanced manufacturing, computing infrastructure and industrial upgrading, alongside consumer and financial businesses serving faster-growing economies.

Risks remain. A global slowdown could weaken demand, while faster semiconductor capacity growth may pressure pricing. Lower-than-expected returns on data-centre investment could also cool cloud spending.

For active investors, the focus is on businesses with pricing power, solid balance sheets and a clear ability to convert investment into profitable growth.

Invest in Asia and EM's next growth cycle

Asia and emerging markets offer a combination that is becoming harder to find elsewhere: reasonable valuations, improving earnings and a broad capital spending cycle.

For Australian investors, the opportunity reaches beyond a narrow AI trade. It provides access to the companies building the factories, power systems and technology infrastructure behind the region's next phase of growth.